Sir Keir Starmer was up bright and early on commuter radio on Monday morning, trying to make fixing potholes sound interesting. Everyone needs a hobby.
But it’s fiscal black holes that are dominating Westminster this week. Starmer and his Chancellor Rachel Reeves would rather you looked away now and tuned back in next weekend.
That’s because her Spring Statement on Wednesday is set to show a worsening economic outlook and more cuts. Just don’t call it austerity.
When Reeves’s economic homework is marked by the Office of Budget Responsibility, in figures published on Wednesday, it’s expected to halve its growth predictions.
That will wipe out the £10bn of wriggle room the Chancellor had against her fiscal targets at October’s Budget and leave her up to £5bn in the red. That amount of money is coppers down the back of a sofa in a UK economy valued at £3.4trn.
The “headroom” refers to the amount Reeves could increase spending or cut taxes without breaking her fiscal rules, particularly the commitment to achieving a current Budget surplus by 2029-30.
Although £5bn in welfare cuts from last week will lessen the shortfall, the Government will enforce additional spending cuts in the upcoming June spending review. Government administration will be cut by £2bn, and all departmental spending will undergo a “zero-based review,” meaning no area is exempt from potential cuts.
As Civil Service unions responded angrily on Monday, Starmer predictably framed the cuts as efficiency improvements, promoting his go-to solution: AI.
“Can we run the Government more efficiently? Can we take some money out of Government? I think we can. I think we’re essentially asking businesses across the country to be more efficient, to look at AI and tech in the way that they do their business. I want the same challenge in Government, which is, why shouldn’t we be more efficient?” Starmer told BBC radio after a good three minutes of airtime devoted to potholes.
The zero-based review has triggered political manoeuvring in Whitehall, with ministers proposing unpopular ideas to force Chief Secretary to the Treasury Darren Jones’s hand.
Reports on Monday suggested Education Secretary Bridget Phillipson had proposed a menu of politically impossible reductions including ending universal free school meals for infants, charging pupils for period products, and scrapping junior ISAs for children in care. Cue hysterics.
While Cabinet ministers are doing what Cabinet minister always do – sticking up for their departments – this “bleeding stump” strategy has its own dangers. It’s not seen as especially collegiate by Cabinet peers and the Treasury.
It was therefore unsurprising that claims of Phillipson’s involvement in the briefing angered her allies, who vehemently denied her connection to the ideas.
In an atmosphere where some Labour backbenchers are in the throes of an existential crisis about whether the party is left-wing enough, the bleeding stump strategy is just another example of exceptionalism pleading and it’s not welcomed at the top of government.
The Liberal Democrats’ accusations that Reeves would end free school meals for infants forced her to deny any such plan in a TV clip. Which was probably half the point of the alleged briefing.
However, deep unhappiness pervades the highest levels of government. Cuts of up to 11.2 per cent have been proposed for departments outside the protected NHS and Ministry of Defence.
Housing Secretary Angela Rayner, Energy Secretary Ed Miliband, Home Secretary Yvette Cooper and Justice Secretary Shabana Mahmood have all raised concerns about their individual fiefdoms in Cabinet meetings.
But if there is one thing more unpopular than spending cuts in Labour circles, it’s Donald J. Trump. When Reeves stands at the despatch box on Wednesday lunchtime, she is likely to say “the world has changed” because of the US president. And she won’t be wrong.
The US economy is already feeling the effects of Trump’s chaotic decisions. New York’s S&P stock exchange suffered due to US instability, in contrast to London’s flourishing FTSE 100. Trump’s unpredictable tariff policies and the Doge job cuts in America have undermined investor and consumer confidence, erasing any previous economic optimism.
Voters support the UK’s decision to help fill the gap in spending on European security left by Trump pulling his support. But how to make savings elsewhere is the problem.
Justifying potential UK tax changes on large tech companies to avoid Trump’s tariffs next month is difficult, especially given the political fallout from the hugely influential Adolescence drama which pins the blame for a murder firmly on social media.
Reeves’s decisions prioritise Labour’s economic credibility in the eyes of bond market vigilantes. Her own party counters that the world’s evolution demands a parallel shift in the rules.
The calls for her to be bolder aren’t only coming from Labour MPs. Now, even former supporters among economists are warning against premature cuts. Gemma Tetlow, of the Institute for Government, advised the Chancellor against “reaching for little bits and pieces to try and get the numbers to just about add up”.
Meanwhile, Andy Haldane, the former Bank of England chief economist, issued a warning against the dominance of “Treasury orthodoxy”. “With the economy stalled, further fiscal belt-tightening is impossible to justify on macroeconomic grounds,” he wrote.
Should Reeves keep her composure and manage to get her party to practice patience, there’s reason for subdued optimism.
Businesses negatively impacted by higher employee national insurance contributions may benefit from a planned industrial strategy prioritising deregulation. Monday also brought a rare piece of good news: UK private-sector output growth hit a six-month high in March, driven by service companies anticipating tariff avoidance in April.
But with growth proving more sluggish than expected, Reeves can blame global turmoil for the economic malaise as much as she likes. It won’t stop the Conservatives saying it is a result of the major tax increase she imposed on businesses last autumn and how she left herself too little wriggle room. Expect potholes aplenty as Reeves tries to keep the Government’s show on the road.
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